Berkshire Chairman's Letter ~ 1978

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We confess considerable optimism regarding our insurance
equity investments. Of course, our enthusiasm for stocks is not
unconditional. Under some circumstances, common stock
investments by insurers make very little sense.

We get excited enough to commit a big percentage of
insurance company net worth to equities only when we find
(1) businesses we can understand,
(2) with favorable long-term prospects,
(3) operated by honest and competent people, and
(4) priced very attractively.

We usually can identify a small number
of potential investments meeting requirements (1), (2) and (3),
but (4) often prevents action.
For example, in 1971 our total common stock position
at Berkshire’s insurance subsidiaries amounted to only $10.7 million at cost,
and $11.7 million at market.

There were equities of identifiably excellent companies
available - but very few at interesting prices.
(An irresistible footnote: in 1971, pension fund managers invested a record 122%
of net funds available in equities - at full prices they couldn’t buy enough of them.
In 1974, after the bottom had fallen out,
they committed a then record low of 21% to stocks.)

The past few years have been a different story for us.
At the end of 1975 our insurance subsidiaries held common equities
with a market value exactly equal to cost of $39.3 million.
At the end of 1978 this position had been increased to equities
(including a convertible preferred) with a cost of $129.1 million
and a market value of $216.5 million.

During the intervening three years we also had realized pre-tax gains
from common equities of approximately $24.7 million.
Therefore, our overall unrealized and realized pre-tax gains in equities
for the three year period came to approximately $112 million.
During this same interval the Dow-Jones Industrial Average
declined from 852 to 805.
It was a marvelous period for the value-oriented equity buyer.

We continue to find for our insurance portfolios small
portions of really outstanding businesses that are available,
through the auction pricing mechanism of security markets,
at prices dramatically cheaper than the valuations inferior
businesses command on negotiated sales.

This program of acquisition of small fractions of businesses
(common stocks) at bargain prices, for which little enthusiasm exists,
contrasts sharply with general corporate acquisition activity,
for which much enthusiasm exists.

It seems quite clear to us that either corporations are making
very significant mistakes in purchasing entire businesses at prices
prevailing in negotiated transactions and takeover bids,
or that we eventually are going to make considerable sums of money buying
small portions of such businesses at the greatly discounted valuations
prevailing in the stock market.
(A second footnote: in 1978 pension managers,
a group that logically should maintain the longest of investment perspectives,
put only 9% of net available funds into equities
- breaking the record low figure set in 1974 and tied in 1977.)

We are not concerned with whether the market quickly
revalues upward securities that we believe are selling at bargain
prices. In fact, we prefer just the opposite since, in most
years, we expect to have funds available to be a net buyer of
securities. And consistent attractive purchasing is likely to
prove to be of more eventual benefit to us than any selling
opportunities provided by a short-term run up in stock prices to
levels at which we are unwilling to continue buying.

Our policy is to concentrate holdings. We try to avoid
buying a little of this or that when we are only lukewarm about
the business or its price. When we are convinced as to
attractiveness, we believe in buying worthwhile amounts.
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